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Coal production problems push export prices up sharply

Queensland (Australia) - Freak weather conditions in Queensland has forced Rio Tinto to declare force majeure on its shipments from its big Hail Creek coal mine adding to worldwide coal production problems and pushing coal prices up to almost untenable levels.

Rio Tinto Ltd on Friday declared force majeure at a northern Queensland coal mine after heavy rains, the sixth miner in Australia to default on coal shipments this year. 

Rio's force majeure at its 4.5 million tonnes a year Hail Creek coking coal mine could put further upward pressure on spot prices, which have already jumped over 80 percent to more than $270 a tonne since the start of the year. 

"A confluence of disruptions with three of the top five exporters around the world having problems has resulted in record prices which are unlikely to moderate," said a Sydney-based coal analyst. He declined to be identified because he was not authorised to speak to the media. 

The Rio move adds to woes for coking coal users such as China's Baoshan Steel or Japan's Nippon Steel Corp, already facing steep price hikes in current negotiations for 2008 term supplies and with margins squeezed by record iron ore prices. 

Rio's Blair Athol and Kestrel mines have also been affected by the rains, but should meet their supply commitments, said a spokeswoman. 

"Hail Creek is the only mine where we have had to declare force majeure because of the recent extreme rain in the Mackay region," said Alison Smith, a spokeswoman for Rio Tinto's coal unit in Australia. 

A monsoonal trough in the Mackay region near Queensland's coast has caused torrential rain in the area, the Bureau of Meteorology said on its Web site. The bureau has forecast that the trough may generate more heavy rain overnight and the state government has declared Mackay a disaster area. 

Rio's Smith could not provide details on the number of shipments that would be affected and added it was too early to say how long the force majeure would be in place. 

Force majeure is a clause in contracts which allows companies to default on sales commitments. 

Resource-rich Queensland has been pounded by heavy rains since January, with the mining region in central Queensland hardest hit by flooding caused by heavy summer rains said to be a one-in-100-year event. 

The deluge has flooded mines, damaged mining equipment and cut access to road and rail lines. Some companies have had to use helicopters to evacuate stranded workers. 

"Pictures of what once were mines that now look more like reservoirs circulating around show the severity of the situation," said the coal analyst. 

COAL PRICES ROCKET 

Australia, the world's second-largest coal exporter, accounts for 65 percent of the world's coking coal exports, data from the International Energy Agency showed. Coking coal is used in the manufacture of steel. 

The global coking coal market was already experiencing a supply crunch prior to the floods. Analysts said a prolonged supply disruption from Australia's coking coal mines could send prices of prompt shipments above $300 a tonne and force some steel mills to halt production. 

"I don't think the steel mills, especially those in India or South America, will be able to cope with this sort of freak jump in prices," said Mark Pervan, a senior resource analyst at the Australia & New Zealand (ANZ) Bank. 

A worsening shortage has already prompted some Japanese and South Korean steel mills to consider buying lower quality coking coal from other markets to make up for the shortfall, said Andrew Pedler, a senior resource analyst from Wilson HTM. 

The world's largest coking coal exporter, the BHP Billiton Mitsubishi Alliance (BMA), as well as Xstrata Plc , Ensham Resources Pty Ltd, Macarthur Coal Ltd and Wesfarmers Ltd have also declared force majeure at mines in Queensland in recent weeks. 

BHP Billiton said on Jan. 24 that it would lose about two weeks of production, or 2.3 million tonnes of coal output, after recent floods at Queensland forced the closure of a number of coal operations. 

Industry sources said production at some of Peabody's coking coal mines have also been affected. The company could not immediately be reached for comment. 

Prices of thermal coal, used in power generation and the manufacturing of cement, have also vaulted in recent weeks, due to supply troubles from Australia and China.

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